By Paul Rickard

If Ramsay Health Care is not Australia’s best company, then I don’t know what is. And when I say “best”, I am speaking from the perspective of a shareholder, and not an employee or customer (patient), but I guess most of these people are reasonably happy too.

Have a look at this share price graph!

Ramsay Health Care (RHC) - July 1998 to August 2016


As you can see by the chart, the share price has gone from $1.69 in July 1998 to $82.97 yesterday, with hardly a pullback. And while this is a market view, the hard figures from the company show that earnings per share have increased over this period (FY1998 to FY2016) at a compound annual growth rate (CAGR) of 16.8%. Reflecting this, dividends per share have increased over the same period at a CAGR of 16.7%!

Importantly, the rate of growth hasn’t (yet) slowed. Rather, it has grown over the last couple of years, with Ramsay reporting on Tuesday that in FY16, core NPAT grew by 16.8% to $481.4m, while core EPS grew by 17.7%.

Core NPAT and EPS - 2013 to 2016

Full Year Result

Core NPAT growth and EPS growth for the full year was ahead of guidance provided in February, which had suggested growth for both would be in the range of 15% to 17%. Driving this was solid revenue growth across all segments, and improved operating efficiencies.

The mainstay of the business, the Australian Hospital Operations, grew revenue by 8.8% to $4.4bn, with EBIT up by 11.8% to $572m. During the year, Ramsay completed developments worth $255m, including major developments at Hollywood Private Hospital in Perth, Cairns Private Hospital, Lake Macquarie Private Hospital, and Wollongong Private Hospital. The company approved over $200m in brownfield developments across the country.

In France, a full year of earnings from Ramsay Générale de Santé hospitals and six months earnings from the HPM Group of hospitals in Lille saw revenue jump by 27.3% to €2.2bn, and EBIT rise by 2.2% to €147.2m. With 142 facilities in France, Ramsay is the clear private hospital leader in that country. There are challenges, in particular with tariff decreases, with Ramsay noting the challenging political environment and the French election, set for May next year.

Ramsay’s UK business delivered a revenue increase of 4% on the back an increase in NHS patient admissions. EBIT rose by 9.5% to £44.3m.

Going forward, Ramsay plans to continue to execute on its four-pronged growth strategy. Firstly, organic growth underpinned by the demographics of an ageing population and increased demand for services from quality operators, and secondly, brownfield capacity expansion to cater for unmet demand. In FY16, Ramsay added over 500 beds and 26 operating theatres, and in FY17, this will include developments at North Shore Private, Peninsular Private Hospital and St Andrew’s Private Hospital at Ipswich, as well as additional operating theatres and a new day surgery in the UK.

The third prong involves public/private collaborations, as Governments look for private operators to provide services to public patients. For example, Ramsay has been appointed to work with the new Albury Wodonga Regional Cancer Centre. The fourth prong is acquisitions and strategic developments. Ramsay’s acquisition of nine hospitals in Lille via the HPM Group was completed last December. It says that it is continuing to investigate opportunities in China.

Ramsay is also making an expansion into the pharmacy business. It currently operates over 200 hospital pharmacy dispensaries across its global hospital portfolio, and is in the process of establishing community pharmacies in strategic locations, concentrating initially on locations in close proximity to its hospitals in Australia.

Financially, the balance sheet is in good shape, with leverage (Net debt divided by EBITDA) down to 2.5 times. For FY17, Ramsay has guided to Core NPAT and Core EPS growth of 10% to 12%.

The Brokers

Ramsay’s profit result was marginally better than broker estimates. Noting the strong result from the Australian hospital operations, the improved French result, and guidance for FY17, most brokers did a back-flip with a double pike and lifted their target price. Morgans from $78.33 to $87.28, Macquarie from $60.00 to $75.00, Citi from $62.41 to $80.19, UBS from $70.50 to $80.50, Credit Suisse from $72.00 to $79.00, Morgan Stanley from $69.03 to $79.30 and Ord Minnett from $72.00 to $85.00.

Post result broker targets and recommendations (source: FNArena), are as follows:

Looking ahead, Ramsay is trading on the spectacular multiple of 32.1 times forecast FY17 earnings, and 28.32 times forecast FY18 earnings. Forecast dividend yields are 1.6% for FY17 and 1.9% for FY18.

Bottom Line

Notwithstanding Ramsay’s superlative record in growing earnings, a multiple of 32 times is extraordinary. And even if Management do their usual “trick” of updating guidance during the year and then exceeding it, such that FY17 EPS growth is 17%, this still puts Ramsay on a multiple of 30.6 times.

That said, sell Ramsay at your peril. Over 18 years, pullbacks have been rare and reasonably shallow. So, as a shareholder, I am staying long. Not buying anymore, but at the same time, reluctant to exit.

If you are not already a Ramsay shareholder, definitely worth adding to your buy list in any market downturn.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.